Selling Royal Mail stake is essential to preserve service, says Mandelson

Dutch giant TNT is keento open partnership talks

The Government is preparing to part-privatise the Royal Mail by selling a minority stake in the struggling business to a foreign buyer.

Lord Mandelson, the Business Secretary, said the move was essential to preserve deliveries six days a week to every address in Britain.

He faces a backlash from unions, which fear that tens of thousands of jobs will vanish in the reorganisation, as well as Labour left-wingers.

The Dutch postal giant TNT immediately said it was keen to open talks over developing a "strategic partnership" with Royal Mail, but Lord Mandelson said he would also welcome expressions of interest from any "credible partners". Other potential bidders include the German-owned DHL Express and the UK-based Business Post Group.

It is thought that ministers – who will begin urgent negotiations with private investors with a view to a decision early in the new year – will offer a stake of between 25 and 33 per cent in Royal Mail.

Although it still delivers 99 per cent of the nation's letters, it faces intensive competition from private-sector rivals for the lucrative contracts for business correspondence.

The relentless growth of email and other digital messaging systems – with the public sending 5 million fewer letters – cost it an estimated £500m last year.

Royal Mail is suffering an additional financial headache with its pension fund now more than £7bn in the red. So acute is the problem that the business is technically "balance-sheet insolvent" because of the pension deficit.

Lord Mandelson announced that the taxpayer would take on that liability, clearing a major obstacle to attracting private-sector investors.

The moves followed the publication of a report by Richard Hooper, former deputy chairman of the media watchdog Ofcom, who called for sweeping modernisation of the 360-year-old business. Mr Hooper concluded: "In a declining market, we now face a stark choice – to modernise more quickly, or decline. The world of communications and the needs of consumers are changing fast. So too must postal services."

The Business Secretary told peers that a massive injection of private capital was essential to securing Royal Mail's long-term future. He said: "It is the only company capable of delivering mail to every address in the UK, six days a week, and, as Hooper makes clear, that will be the case for the foreseeable future. So a healthy Royal Mail is vital to sustaining the universal service."

Lord Mandelson added: "I believe that Royal Mail and the postal market can thrive in the future – provided that decisive action is taken now. Without far-reaching change, the opportunities brought by technology will become overwhelming threats. This need not be the case. I believe that there are benefits for everybody in the package of measures that we intend to take forward."

Mr Hooper's report warned that the business was less automated or efficient than its western European counterparts, where 85 per cent of mail is sorted by machine into the right order for delivery. In Britain it is still done entirely by hand.

The Communication Workers Union fears that 50,000 of the 170,000 Royal Mail jobs could be axed. Dave Ward, its deputy general secretary, said: "There is no need to seek private funding from outside companies in a joint venture. This would open the floodgates for full-blown, damaging privatisation."

The former cabinet minister Peter Hain also protested that the moves "would open the door to full-scale privatisation against the wishes of our party and our Government".

The new partnership will have no direct effect on the network of 11,500 Post Office branches, but Lord Mandelson added that a "healthier Royal Mail letters business will be good for the Post Office".

Peter Bakker, chief executive of TNT, said: "Exploring a strategic partnership with Royal Mail makes a lot of sense for both our companies. The objective of the partnership would be to help develop Royal Mail into a modern, best-in-class postal operator that combines excellent mail service with solid and sustainable financial performance as part of a broader global network."